Friday, February 27, 2015

Cost at the pump down by a buck in the last year. My question is where did that buck you are saving come from? Or better still where did that buck go last year that it isn't going this year?

Fuel in the US is a fascinating product. Unlike many of the things we buy every day there is a long chain of stops between the oil in the ground and the fuel at the pump. With a dozen eggs there is a relatively short supply chain. The chicken “rancher” harvests the eggs and sends them to a wholesaler who delivers them to a market and you buy it from your local grocery store. OK, maybe there is a distribution warehouse in between but the point is there is little change in the eggs between the chicken and the store.

Gasoline on the other hand has a lot more stops. Pump out of the ground and then to a refinery. In many cases the buyer at the well is just a wholesaler and resells to a refiner who resells to a wholesaler who resells to a name brand who resells to a local gas station.

In many cases that local gas station is really a franchise holder for that national brand and is an independent business sell that brand fuel in the same way they sell packs of gum or candy bars.

With each step in the supply chain, each of those independent businesses add profit.

Anyone out there believe that those businesses are selling at a loss at today’s prices? At least for very long? Cheaper not to pump it out of the ground than sell at less than it cost to pump it up, right? Same thing, if I can’t buy it and refine it for more than my cost, I’ll shut down the refinery. If I can’t sell the gas for more than I paid for it, I won’t refill the tanks at my gas station.

So that buck you are saving was a few pennies profit for each of those steps in the supply chain. Remember they aren't taking a loss so you can save that buck, they are just taking a few cents less profit.

Here is the key to learn - all those companies could have survived nicely on a tiny bit less profit last year and boosted the entire economy in the US. All those extra dollars per gallon that the supply chain siphoned off into their bank accounts, could have been spent by consumers on new shirts, TV and all the other things that would employ workers and pay salaries.

Okay, that buck alone won't restore the entire US economy - BUT - that same process of siphoning off the last fraction of a percent of profit by every business in the US is locking up huge amounts of capital. Money that could be circulating throughout the rest of the economy and lifting every other person and business out of the current stagnation.